Clear Eyed Capitalist

The modern world of Peer-to-Peer (P2P) lending

Browsing Edgar in search of a potential company filing I stumbled across tons of filings by “Lending Club Corp” (CIK – 1409970 /SIC – 6199) Curious as to why they were coming up in my search I clicked through to read a few. I was not able to resolve why I was seeing them, but I did find them quite unusual for an SEC filing – they looked like loan reports. They start off describing a note with an interest rate, service charge, initial maturity and final maturity. OK, a note is indeed a security. Then it describes a person: their home ownership status, current employer, gross income, debt-to-income ratio and location. Eh? The next section includes info about their credit: total credit balance, a credit score range, how much they have delinquent. This is not an SEC filing I’ve ever seen before!
Now really curious I searched on Lending Club Corp, and also found some references to Prosper, LLC. Aha, now that’s a name I recognize – the industry leader in Peer-to-Peer lending until they were shut down by the SEC who essentially declared the business illegal. I knew they had restarted and I had heard they were complying by essentially treating every peer-to-peer loan as a security on the bond market. And wow, so they are! I found their prospectus and in the first page it describes how they are a marketplace where investors can buy Notes which will correspond directly to borrower loans and represent the right to a pro-rata share of those loan repayments. Those Notes are paired with Management Rights which are a contract that Prosper Marketplace will perform their responsibilities of maintaining the investment platform, providing scoring, remitting borrower payments and collecting on delinquent accounts.

That’s very interesting because it sounds like perhaps instead of taking a % of the repayment like a traditional lender, they’re getting a fee-for-service for managing the loan. Yes, I can see that in the prospectus, Prosper passes on pro-rata share of principal and interest, less their service fee and any collections costs they incur. Further, they do not pass on NSF fees charged to the borrower. Nice! So if a loan goes bad, investors take the loss, investors pay the collection costs and Prosper still gets to charge the borrower fees. Since the borrower is broke, presumably they’re not paying the fees, does their write-off get to become collection costs as well?
From the prospectus, it sounds like the SEC filings on loans contain a subset of the information available on their platform – it’s missing their proprietary scoring at least. Prosper Marketplace Inc (PMI) is just providing the platform/marketplace. Loans are actually funded by a separate entity: WebBank, a Utah bank.

Borrower Loans. If at the end of the bidding period the listing has received bids equal to or exceeding the minimum amount required to fund, a loan will be made to the applicant in an amount equal to the total amount of all winning bids. All borrower loans are unsecured obligations of individual borrower members with a fixed interest rate set by PMI and a loan term currently set at one, three or five years, although Prosper Funding may expand the range of available loan terms in the future to between three months and seven years. The minimum and maximum principal amounts for borrower loans are currently $2,000 and $25,000, respectively, but in the future Prosper Funding may permit borrowers to request loans in principal amounts between $500 and $35,000. All borrower loans are funded by WebBank, a Federal Deposit Insurance Corporation (“FDIC”) insured, Utah-chartered industrial bank. After funding a borrower loan, WebBank sells and assigns the loan to Prosper Funding, without recourse to WebBank, in exchange for the principal amount of the borrower loan. WebBank has no obligation to Note holders.

Thanks for the post on P2P! It sure is disconcerting that lenders’ credit profiles are available publicly. I spoke to someone who said, when they discovered that fact, they wouldn’t invest in Lending Club anymore. I find the Lending Club/Prosper model of anonymously-lending-to-strangers-to-make-money a little disturbing because of the anonymity. It seems counter to a whole set of social benefits we could be realizing through all things P2P. Also, as I search for solutions for unaccredited investors, I ask, is this really a space where the small time, unaccredited investor can do good and make a little money? Or is it only benefitting the folks who have enough time and money to spread themselves across 800 different notes? LC’s return calculations are based on having 800 notes which you can only do with a minimum investment of $20K. Bottom line for me is that while LC and Prosper are a step in the right direction, they have a ways to go before it’s a fully sustainable system. Lot’s to think about in this space. Thank you again for bringing it to light!

This is a great post on the state of the industry. To Rachel’s point, the credit details are public, but the the borrower’s name / SSN are not public (so you cannot track down the borrower). That is good and bad. Bad because you might not get a full picture of a borrower, but good because there could be safety concerns etc if the details were public. There are solutions coming out (disclaimer: I’m working on one of them) that do something similar for small business lending, but in those cases the borrowers are *not* anonymous and we strive for lenders to support businesses in their communities.